Banking reporter

'Crises don't happen out of thin air. There's a beginning, a middle and an end.'

The man who is second in charge of Wall Street's most eminent investment bank believes the world is sowing the seeds of the next financial crisis.

Gary Cohn, chief operating officer at Goldman Sachs, on Friday warned that in trying to make banks safer, global regulators risked spreading new dangers throughout the financial system.

By forcing banks to build up larger capital buffers to absorb losses and hold more liquid assets, regulators are sending borrowers to other, less-capitalised ''shadow banks'', he said.

''Crises don't happen out of thin air. There's a beginning, a middle and an end,'' Mr Cohn told BusinessDay.

''People were all shocked about the 2008 housing crisis.

''You can go back into newspaper articles when the [US] Congress approved the agencies taking on sub-prime loans. It was foreshadowed. All of these things are foreshadowed by people who understand financial markets.''

Mr Cohn, the deputy to global chief executive Lloyd Blankfein and a potential successor, argued that the wave of global moves to make banks less risky since the GFC were ''almost, in essence, foreshadowing the next crisis''.

''If we continue to live in a world where safety and soundness and inflappability of banks trumps everything else, trumps economic growth, and trumps liquidity, you are going to continue to see shadow banks grow bigger and bigger until of course maybe shadow banks become the next problem or until liquidity becomes the next crisis,'' Mr Cohn said.

While he stressed he was not comparing shadow banking to sub-prime lending, he said that policies that forced banks to withdraw capital from the financial system threatened to choke growth, encourage shadow banking, and restrict banks' ability to trade in financial markets.

''When you sort of push the air around in a balloon it has to come out somewhere else,'' Mr Cohn said.

''So if you're telling banks to build capital, and make themselves unbelievably robust and make themselves sort of foolproof in their capital footings, then someone will jump into that void.''